Luxembourg Modernises Carried Interest Tax to Boost Financial Sector

Luxembourg is set to overhaul its carried interest tax regime starting with the 2026 tax year, aiming to strengthen its position as a hub for alternative investment funds and asset management professionals. The draft legislation, submitted in mid-2025 and under review in parliament, broadens the definition and scope of carried interest that qualifies for special tax treatment and clarifies the tax conditions under which different types of carried interest will be taxed. 

Under the proposed rules, carried interest will be split into categories. Some types not tied to direct investment holdings may be taxed at a fixed preferential rate around 11–12 percent, while carried interest linked to a defined participation in a fund may be fully exempt from income tax if certain holding requirements are met. 

The reform aims to eliminate the existing temporary regime and replace it with a permanent, clear framework that attracts fund managers, executives, and other professionals whose performance-based compensation is tied to investment returns. This legal certainty is expected to make Luxembourg more competitive compared with other financial centres. 

Tax advisors say the changes are in line with broader government efforts to diversify the country’s financial ecosystem and support private equity and alternative investment activities as part of economic strategy for the next decade. 

👉 Read more: pinsentmasons.com/out-law/analysis/luxembourg-reform-interest-tax 

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